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Briefing highlights

  • Loonie hit by BoC comments
  • U.S. dollar perks up after Yellen
  • CSX soars as Harrison prepares venture
  • Factory sales climb in November

Loonie hit

To twist an old phrase, you can’t keep a good dollar down. The Canadian variety, however, is another matter entirely.

The good dollar, for the sake of the phrase, is the greenback, which U.S. president-elect Donald Trump indeed managed to knock down, but is rebounding. And analysts say he likely can’t keep it down.

The Canadian variety would be the loonie, which central bank Governor Stephen Poloz also managed to knock down, and analysts say won’t just stay there but will probably fall further still.

As JPMorgan Chase noted, the loonie was hit by two “vulnerabilities” Wednesday, the first being comments from the Bank of Canada, and the second being comments from Wilbur Ross, the nominee for U.S. Commerce Secretary in the Trump administration.

The loonie is now sitting at about 75 cents (U.S.), driven down sharply Wednesday after Mr. Poloz said an interest rate cut is still a possibility, and that the recent appreciation in the currency doesn’t bode well for exports.

Mr. Poloz and his central bank colleagues have been counting on a lower loonie to help juice Canada’s economy by making its exports more competitive. Which means cheaper, but there’s much more to it than that.

The U.S. dollar has been gaining on most currencies, Mr. Poloz noted. But the Canadian dollar, buoyed by rising oil prices, has also been gaining on many others.

“This combination creates two additional headwinds for Canadian exports: softer U.S. exports will mean lower demand for Canadian components of those U.S. exports; and Canada will lose more competitiveness in the U.S. market compared with exporters from other countries,” the central bank chief said.

As Bank of Montreal senior economist Robert Kavcic noted, the effective exchange rate, when you exclude the U.S. dollar, has climbed over the last year, and hasn’t really changed all that much from the levels of two or three years ago, or longer.

Ah, but the Canadian dollar has been eroding against its U.S. counterpart.

“For example, from the perspective of a U.S. business looking to import, facing a choice between Canada and Mexico, the former has been losing currency competitiveness to the latter,” Mr. Kavcic said.

Mr. Poloz wouldn’t say it, but he couldn’t not be pleased to see the loonie fall after the comments that came with Wednesday’s decision to hold the central bank’s benchmark overnight rate at 0.5 per cent.

“Clearly the bank would be more comfortable with a weaker Canadian dollar as it would boost exports,” said senior economist Benjamin Reitzes, Mr. Kavcic’s colleague at BMO, calling the central bank’s comments “a shot right across the bow of the loonie.”

Economists generally believe the loonie is poised to sink further, particularly given the threat to Canada’s economy from a protectionist Mr. Trump and his Republican colleagues. Analysts project a Canadian dollar somewhere in the 70-cent to 72-cent range, and possibly even lower.

Which brings us to JPMorgan’s second vulnerability.

As The Globe and Mail’s Robert Fife reports, Mr. Ross has warned Canada that, in overhauling the North American free-trade agreement, the U.S. is keen on discussing the country of origin rules and dispute tribunals that are part of the pact.

At his confirmation hearing Wednesday, Mr. Ross “reinforced the idea of a hard-line stance on trade, a prioritization of NAFTA renegotiation, that suggest that Canada remains at heightened risk of trade tension disruption, even if not in the direct cross-hairs of Trump’s trade policy,” said Daniel Hui of JPMorgan.

Mr. Ross said NAFTA was a logical initial target, and he supported “the idea that tariffs (and 35-per-cent tariffs explicitly) are an important tool of negotiation and a legitimate method of punishment against unfairness by trade partners,” Mr. Hui added.

“Finally, in the closing moments of his hearing, he flagged recent weakness in [the Mexican peso and Canadian dollar] explicitly as validating signals that Trump’s message of getting tough on trade was being received and that trade partners were being put on notice.”

And so, back to the good dollar.

Mr. Trump said earlier this week that he believes the greenback is too strong. That took some of the steam out of the currency, as did his failure to elaborate on his fiscal and economic plans earlier, at his first press conference as president-elect.

But “we doubt that he will be able to keep the currency down for long,” said John Higgins of Capital Economics in London, citing three factors.

First, Mr. Higgins said, other world leaders wouldn’t agree with Mr. Trump’s argument, and thus there would be no co-ordinated currency intervention. There’s little chance of Europe or Japan, for example, supporting a softer greenback given that those economies aren’t faring particularly well.

Second, and others have cited this, Mr. Trump’s stated protectionism will probably push the U.S. dollar higher.

“For example, imposing large tariffs on goods and services imported into the U.S. would reduce the country’s demand for them, putting upward pressure on the U.S. currency,” Mr. Higgins said.

“Even if other countries retaliated in kind, there would be probably still be a net boost to the dollar because the U.S. imports more than it exports.”

The third reason relates to monetary policy, which has diverged around the world. The Federal Reserve is in the midst of a cycle of raising interest rates, which Fed chair Janet Yellen reinforced yesterday, while other central banks stand pat, automatically making the U.S. dollar more attractive.

Or, in the case of the Bank of Canada, openly talking about the possibility of a rate cut, automatically making the Canadian dollar that much less attractive.

CSX surges

Shares of CSX Corp. are surging as Hunter Harrison joins forces with an activist investor to shake up the U.S. railway.

As The Globe and Mail’s Eric Atkins reports, Mr. Harrison is leaving as chief executive of Canadian Pacific Railway Ltd., giving up pension, benefits and stock valued in the tens of millions.

Reports say he’ll join with activist investor Paul Hilal in his latest venture.

Factory sales jump

Canada’s manufacturers saw a rebound in sales in November, after a dip a month earlier.

Shipments rose 1.5 per cent, Statistics Canada said, with sales up in 14 of 21 industries measured, accounting for 68 per cent of all sales.

Inventory levels dipped 0.2 per cent, and new orders climbed for the third straight month, up 0.5 per cent.

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